Optimal production/marketing system

Part III in a series on the changing corn environment.

We all understand that different ranch production/marketing systems lead to different financial performances, but which one is optimal for your ranch?

Because the emerging biofuels era has broken the cattle cycle, we can't expect ranch profits to cycle any longer. As the biofuels era progresses, ranch-level profit margins per cow will get increasingly smaller.

The increasing economic pressures mean that ranchers must focus more management attention on determining their unique optimal production/marketing system. To that end, here are my current economic analyses of seven production/marketing systems.

I project a new set of beef industry planning prices each month, then evaluate their management implications for ranchers. My evaluation focuses on the alternative production/marketing systems of clients I have documented over the last several years. I've studied and built these figures into a set of spreadsheet templates I update each month with my latest set of planning prices. I'm always looking for that system whose bottom line outperforms the other alternatives.

Back when we had a cattle cycle, no single production/marketing system dominated for the complete cycle. At the cycle's bottom, big cows producing big calves generated the most profit. At the cycle's top, smaller cows producing smaller calves dominated. But with the cattle cycle broken, I expect one production system to dominate in the emerging biofuels era.

Each marketing alternative involves a 600-cow herd. Figure 1 depicts the earned net returns to unpaid labor, management and equity capital, as well as bottom-line projections.

Each alternative was divided into its respective profit centers with an economic bottom line generated for each profit center. The overall bottom line for each system is the sum of the profits (or losses) from all the profit centers in that system.

Calves are priced into and out of each profit center. This ensures no one profit center is subsidized by another profit center, which differs from what most ranchers do. I continually find ranchers who subsidize one profit center with another, which leads to erroneous marketing conclusions.

A corn-market price basis of a negative 47¢/bu. was used to localize the Chicago corn futures price to western Nebraska and eastern Wyoming ranches. In other words, the corn used in each production/marketing system was priced at 47¢ off that month's futures price. In this study, I used the Chicago corn futures price for May 16, 2008, and further assumed that corn was priced the month it was consumed.

The description of each alternative includes the average corn price, projected cost of gain and calculated breakeven selling price for each profit center.

Figure 1 indicates significant bottom-line differences between the systems. I expect the magnitude of the differences in this simulation to hold true on many ranches, which is why it's critical that ranchers reconfirm their optimal spring-calving production/marketing system.

Figure 1 also depicts the projected profits for 2007 fall-born calves (Aug./Sept. calving). While the winter-feed bill and UCOP are projected to be higher for fall-born than spring-born calves, the post-weaning fall-born calf marketing programs result in more total-herd profitability. Note that the calves were marketed off grass in this analysis and not finished due to the large negative finishing profits projected (Figure 3).

I'm not proposing that ranchers apply my numbers to their operations, but they should apply my process to their operation in order to reconfirm that their current production/marketing system is still optimal. The broken cattle cycle and the low profit margins per cow projected for the rest of this decade and beyond make this management action absolutely necessary.

Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 orharlan.hughes@gte.net.